Barriers too Trade

September 20, 1984

The White House decision on steel quotas illustrates a disturbing trend in the Reagan administration's foreign trade policy. It has refused to adopt formal quotas but instead will seek informal arrangements with steel-exporting countries to reduce their sales in this country to about 181/2 percent of the U.S. market. The administration avoids the appearance of open protectionism while actually moving in a protectionist direction.

The administration has talked about the desirability of free trade; it has opposed the domestic content bill for cars, and it has introduced a trade initiative for the Caribbean basin. Earlier this month it refused to limit imports of copper. But it also imposed quotas on Japanese cars that cost American consumers about $1,000 per car. It further tightened limits on imports of textiles and garments from developing countries. And it imposed earlier restrictions on U.S. purchases of foreign specialty steel.

Inconsistency and an apparent desire to appear to favor open markets, while actually restricting imports, have characterized the last three years. For voters, the problem is that Walter Mondale's proposed alternatives are worse.

Mondale strongly supports the domestic content bill, which would drastically reduce U.S. imports of Japanese cars, and has also argued for strict quotas on steel imports. He has promised the Amalgamated Clothing and Textile Workers that imports of their products would be sharply restricted if he were elected, and a similar commitment has been made to shoe workers. For the first time in recent memory a major U.S. party has nominated a presidential candidate who is openly protectionist.

Our trading partners view the recent trends and prospects for U.S. trade policy with grave misgivings, and developing countries are particularly worried. Before the United States pursues Walter Mondale's thoroughly protectionist policies or continues with President Reagan's more inconsistent approach, the implications of increased U.S. protectionism should be thought out carefully.

The domestic content bill, for example, would sharply reduce U.S. demand for Japanese cars and therefore demand for yen to pay for them cars. Under the current regime of floating exchange rates, the yen would depreciate and the dollar would appreciate until the balance of payments was restored. The exchange rate for the dollar is already so high as to cause serious injury to U.S. export and import-competing industries.

The adoption of the domestic content bill would push the dollar considerably higher relative to the yen, worsening the problems of other U.S. industries. Every job saved in the uto industry would be offset by a job lost elsewhere. It does not appear that supporters of domestic content have informed these other industries and their employees what its adoption would mean for their futures.

As protectionism spreads from cars to steel, textiles and shoes, the target is no longer just Japan. The victims start to include a number of developing countries. U.S. policies that restrict imports from developing countries create at least two major threats to U.S. interests.

First, there is the matter of the massive debts owed to U.S. banks. Brazil, Mexico and the other less developed debtor countries cannot repay our banks in dollars; they do not have dollars. They can only repay in goods -- that is, by exporting more to the United States and other industrialized countries to earn the dollars with which to pay the banks.

If the United States makes it impossible for these countries to steadily increase their exports of goods such as steel, garments and shoes, it will also make it impossible for these countries to repay their debts or even make scheduled interest payments. A number of major U.S. banks have lent well over 100 percent of their net worth to developing countries and now face serious repayment problems.

For the stability of our banking systems, the implications of a U.S. shift toward protectionism are not pleasant. Major difficulties in the large banks mean financial losses for the Federal Deposit Insurance Corporation and ultimately for the U.S. Treasury. If Mondale's or Reagan's protectionism makes it impossible for Brazil to export more to earn funds to repay debts to U.S. banks, the resulting losses are going to be borne largely by the U.S. taxpayer.

Finally there is the broader issue of the basic development strategy pursued by developing countries and the U.S. role in the Third World. For a number of decades the United States has been encouraging developing countries to follow an export-led, market approach to economics, in opposition to those in Moscow, Havana, and elsewhere who have advocated non-market, inward-looking strategies. The results for the past two decades make it very clear that the United States was correct and that our opponents were dead wrong. The developing countries that have done well are overwhelmingly those that have used a market approach and that have pursued exports. The statistical evidence for the past 20 years has been widely understood among development planners in China and India, and there is a strong attempt in both countries and elsewhere to shift policies in the right direction.

The success stories among developing countries have been possible, however, only because the United States and its allies have been willing to purchase growing volumes of their exports. If this country now becomes protectionist, the successful strategy of the rapidly growing countries will become impossible for nations such as India and China, leaving them no choice but to move back toward an inward-looking, centrally planned approach to economic policy. The United States has won a major intellectual victory in the developing countries, but we may throw that success away and literally snatch defeat from the jaws of victory.

The choice between the trade policies of the two candidates is not easy, but Walter Mondale seems to be committed in principle to a series of protectionist measures, while the Reagan administration may be merely placating various groups of protectionist voters, and thus its policies might improve after the election. In addition, the domestic content bill would be a permanent change in U.S. trade law, while the car quotas are supposedly temporary and may be ended next April. We are offered a choice between a candidate who is consistently wrong and one who is inconsistent but often wrong. Perhaps inconsistency is better.